The Economic Argument Is Over — Paul Krugman Has Won

For the past five years, a fierce war of words and policies has been fought in America and other economically challenged countries around the world.

On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This “stimulus” spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again.

On the other side were economists and politicians who wanted to cut spending to reduce deficits and “restore confidence.” Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which economic growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and “confidence” would return.

This debate has not just been academic. It has affected the global economy, and, with it, the jobs and livelihoods of hundreds of millions of people.

This article in Business Insider Magazine talks about an academic paper that was part of the main issue or argument for those that oppose more government spending in order to grow the economy. The paper found that a ratio of 90%-debt-to-GDP was a threshold above which countries experienced slow or no economic growth. The problem is that recently the paper was found to contain an arithmetic calculation error.

This error wipes out the argument that stimulus money as opposed to debt reduction is a bad thing. It points out that the pumping monies into rebuilding infrastructure is a better plan than government sequester which will just hurt the economy and stagnate our already dismal growth. – JW

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